Chapter 5

Question 1

What is market structure

Answer 1

The organisational and other characteristics of a market

Question 2

What are entry barriers

Answer 2

Obstacles that make it difficult for a new firm to enter a market

Question 3

What are exit barriers

Answer 3

Obstacles that make it difficult for an established firm to leave a market

Question 4

What is product differentiation

Answer 4

The marketing of generally similar products with minor variations or the marketing of a range of different products

Question 5

What is the divorce of ownership from control

Answer 5

The owners and those who control the firm are different groups with different objectives

Question 6

What is satisficing

Answer 6

Achieving a satisfactory outcome rather than the best possible outcome

Question 7

What is productive efficiency

Answer 7

For the economy as a whole occurs when it is impossible to produce more of one good with pricing less of another
For a firm occurs when the average total cost is minimised

Question 8

What is allocative efficiency

Answer 8

Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets in the whole economy price must equal marginal cost

Question 9

What is allocative inefficiency

Answer 9

Occurs when p>Mc in which case too little of a good which is produced and consumed and when p< mc in which case too much of a good is produced and consumed

Question 10

What is allocative inefficiency

Answer 10

Occurs when p>Mc in which case too little of a good which is produced and consumed and when p< mc in which case too much of a good is produced and consumed

Question 11

What is a monopoly

Answer 11

One firm only in a market

Question 12

What is monopoly power

Answer 12

The ability of a monopoly to raise and maintain price above the level that would prevail under perfect competition. Market power can also be exercised usually to a lesser degree by firms in oligopoly and monopolistic competition.

Question 13

What are natural barriers

Answer 13

Barriers to market entry cause by geography

Question 14

What are sunk costs

Answer 14

Costs that have already been incurred and cannot be recovered

Question 15

What are artificial barriers

Answer 15

Man made barriers to market entry eg patent protection

Question 16

What is the concentration ratio

Answer 16

Measures the market share of the biggest firms in the market

Question 17

What is market conduct

Answer 17

The pricing and marketing policies pursued by firms this is also known as market behaviour, but it is not be confused with market performance which refers to the end results of these policies

Question 18

What is a cartel

Answer 18

A collusive agreement by firms usually to fix prices sometimes there is also an agreement to restrict output and to deter the entry of new firms

Question 19

What is price leadership

Answer 19

The setting of prices in a market, usually by a dominant firm which is then followed by other firms in the same market

Question 20

What is price agreement

Answer 20

An agreement between a firm and similar firms, supplier or customers regarding the pricing of a good or service

Question 21

What is a price war

Answer 21

Occurs when rival firms continuously lower prices to undercut each other

Question 22

What is price discrimination

Answer 22

Charging different prices to different customers for the same product or service with the prices based on different willingness to pay

Question 23

What is a contestable market

Answer 23

A market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit barriers and no sink costs and both incumbent firms and new entrants have access to the same level of technology

Question 24

What is hit and run competition.

Answer 24

Occurs when new entrant can hit the market make profits and then run given that there are no or low barriers to exit

Question 25

What is static efficiency

Answer 25

Efficiency at a particular point in time

Question 26

What is consumer surplus

Answer 26

A measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good

Question 27

What is producer surplus

Answer 27

A measure of the economic welfare enjoyed by firms or producers the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

Question 28

What is deadweight loss

Answer 28

The loss of economic welfare when the maximum attainable level of total welfare fails to be achieved

Question 29

What are the key features of perfect competition?

Answer 29

- a large number of buyers and sellers - with perfect market information - able to buy/sell as much as they wish at ruling market price - unable to influence the market ruling market price - uniform product - no barriers to entry or exit in the long run

Question 30

How to distinguish between different market structures?

Answer 30

- The number of firms in a market - Market entry barriers - product differentiation

Question 31

What are other possible objectives other than profit maximisation?

Answer 31

Growth maximisation and survival as business objectives Sales revenue maximisation satisficing principle

Question 32

what are the advantages of monopoly?

Answer 32

economies of scale | dynamic efficiency

Question 33

what are the disadvantages of monopoly?

Answer 33

productive inefficiency | allocative inefficiency

Question 34

How does monopolistic competition resemble perfect competition?

Answer 34

- large number of firms in the market - in long run there are no barriers to entry and exit - as a result entry of new firms attracted by short run abnormal profit brings down price

Question 35

How does monopolistic competition resemble monopoly?

Answer 35

- each firm faces a downward-sloping demand curve this results from the fact that each firm sells slightly differentiated products - Each firms marginal revenue curve is below its average revenue curve which of course is the demand curve for the firms output

Question 36

What are the various forms of non price competition?

Answer 36

- marketing competition, including obtaining exclusive outlets such as tied public houses and petrol stations through which breweries and oil companies sell their products - use of persuasive advertising, product differentiation, brand imaging, packaging, fashion and style and design - quality competition, point of sale service and after sales service

Question 37

What are some different examples of market conduct in oligopoly?

Answer 37

- Interdependence and uncertainty in oligopoly - non collusive oligopoly, collusive oligopoly and cartels - collusion vs market cooperation

Question 38

What are the criticisms of the kinked demand curve?

Answer 38

it does not explain how and why a firm chooses in the first place to be at a point x where the two lines meets the evidence provided by the pricing decisions of real world firms give little support to the theory

Question 39

What are the possible advantages of oligopoly?

Answer 39

- firms can benefit from economies of scale which means they can become more dynamically efficient and can pass on cost cuts as low prices to consumers - with only a few firms will be easy for consumers to compare and choose the best option for their needs - provided there is a degree of competition oligopolists continue to innovate and develop new and better products

Question 40

what are the possible disadvantages of oligopoly?

Answer 40

- restrict output and raise prices firms may satisfice content with an easy life - cartels are a bad form of market structure - small competitive, innovative firms may find it difficult to enter the market - producer rather than the consumer ends up being king

Question 41

successful price discrimination requires what following conditions to be met?

Answer 41

- must be possible to identify different groups of customers or sub-markets for the product - the different groups of customers must have different price elasticities of demand - markets must be separated to prevent seepage

Question 42

Appropriate policies suggested by the theory of contestable markets include removal of:

Answer 42

- licensing regimes for public transport and television and radio transmission - controls over ownership, such as exclusive public ownership - price controls that act as a barrier to entry such as those which used to be practised in the aviation industry